How to Tell If Your Bank Is Safe

Spot the red flags that mean your bank could be in trouble

Asian woman using her bank account to take the money from the ATM
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Banks are trusted institutions that consumers expect to keep their money safe while allowing it to grow and earn interest. But like any company, a bank can face financial struggles or even fail.

If your bank fails, it can put your financial well-being at risk. Learn the signs that a bank may be struggling and steps you can take to protect your accounts.

Bank Safety Checklist

No matter which financial institution you choose, you can take a proactive approach to making sure your funds are safe at your chosen bank or credit union.

  • Insurance coverage: Only deposit your funds in banks that state that they're insured by the Federal Deposit Insurance Corporation (FDIC) or credit unions that state that they're insured by the National Credit Union Administration (NCUA).
  • Mind the cap: Even though your funds are insured, the coverage is capped at $250,000 per person, per account, per entity. If you have additional funds, consider depositing them at another bank or putting them into certificates of deposit, which are also FDIC-insured.
  • Follow the news: Be aware of any news that mentions the possibility of your bank being acquired or sold. This is usually a sign of financial distress.
  • Research your bank: The FDIC keeps its problem bank list confidential, but Weiss Ratings uses a similar grading system for its Bank Safety Ratings. This rates banks by letter grade and allows you to look up your bank. You can also evaluate your bank's Texas Ratio.

Signs a Bank Could Be In Trouble

If you have concerns about whether your funds are safe in your local bank, several signs can alert you when a bank is in trouble. Your bank could be struggling if it:

  • Closes multiple branches
  • Lays off staff
  • Eliminates incentives such as fee-free accounts
  • Significantly increased fees

Signs like these often incidate that a bank is in financial difficulties and attempting to conserve cash.

You can also check for signs such as declining deposits for the current year over last year by looking up your bank on the FDIC website. If a bank has delayed financial reports such as earnings releases, it could mean the bank is struggling with a changing valuation.

If you really like numbers, you can view the Uniform Bank Performance Report on the Federal Financial Institutions Examination Council website. This report lists various financial ratios and shows whether your bank's capital ratios are deteriorating as compared to its peer banks.

If a bank is struggling financially, it may not have enough cash on hand to pay out all your money on request. This is because banks lend out funds to other customers.

Luckily, safeguards also exist at banks to protect your funds up to a certain limit. With a little due diligence, you can ensure that your money is in a safe place.

What Is Federal Deposit Insurance?

One of the most powerful safeguards is insurance backed by the U.S. government. For banks, you’ll want FDIC insurance. Credit unions use NCUSIF insurance.

While most financial institutions are insured by these government entities, it's not mandatory. Check that yours is insured before making any deposits.

Even with federal deposit insurance, you can still lose money if you have too much in one institution. The insurance covers funds up to $250,000 per person, per account, per entity.

This means that if you have over $250,000 in an account, you'll need to divide it up into separate accounts or even separate institutions of no more than $250,000 per account.

This ensures that if one bank goes down, all of your money won't be lost. You won't need to to take your money out of a failed bank or join in a run on a bank.

Bank Ratings

If you want to avoid bank failures, avoid weak banks. You can identify weak banks by check rating services to see how your bank or credit union is rated.

After the financial turmoil of 2009, the FDIC had almost 900 banks on its "problem bank list." This confidential list analyzes statistics that indicate a bank's financial health and stability, including:

  • The number of outstanding loans
  • Payback or loss amounts
  • Loans the bank has charged off due to nonpayment
  • Overall bank assets
  • Net interest margins, and many other

By 2019, thanks to many key banking industry changes, the number of banks on the FDIC list numbered less than 60.

If banks continue to have problems and can't make it off the problem bank list, the FDIC steps in and takes control of the bank; sells it to a more financially viable, stronger bank; or liquidates the bank's assets and refunds all of the bank customers' deposits.

Read the News

If you are worried that your money is at risk, pay attention to financial news. Banks that appear frequently in negative or surprising news stories might be close to failure.

However, if you are fully insured, you can choose to ignore the stories and leave your money where it is. Another bank will buy the assets, and in most cases, you'll be able to use your money without interruption.